You aunt offers you a choice of $60,000 in 40 years or $850 today. If money is discounted at 11 percent, which would you choose.
To determine which option is more beneficial, we need to compare the present value of the $60,000 in 40 years to the $850 offered today. We can calculate the present value using the discounted cash flow (DCF) formula.
The formula to calculate present value is:
PV = FV / (1 + r)^n
Where:
PV = Present Value
FV = Future Value
r = Discount Rate (as a decimal)
n = Number of periods
In this case, the discount rate is 11% (0.11) and the number of periods is 40 years.
Let's calculate the present value of the $60,000 in 40 years:
PV = 60,000 / (1 + 0.11)^40
Using a calculator or spreadsheet, we find:
PV ≈ $3,158.38
So, the present value of $60,000 in 40 years is approximately $3,158.38.
Now, let's compare this to the $850 offered today. We can clearly see that $3,158.38 is significantly higher than $850. Therefore, from a financial standpoint, it would be more beneficial for you to choose the $60,000 in 40 years over the $850 today. This is because the present value of the larger amount is higher when discounted at 11%.